Three-week high for oil due to cuts to OPEC and output goals
Prices for oil remained at three-week record highs on Thursday, following the OPEC+ agreement to tighten the supply of crude globally through a deal to reduce production goals by 2 million barrels each day (BPD) which is the biggest reduction since the year 2020.
Brent crude futures climbed by 88 cents, or 0.9 percent in value, and were at $94.25 per barrel at 1119 a.m. (ET) (1519 GMT) after settling 1.7 percent higher in earlier sessions. U.S. West Texas Intermediate (WTI) crude futures increased to 79 cents which are 0.9 percent and reached $88.55 as they closed 1.4 percent higher on Wednesday.
A deal between the Organization of Petroleum Exporting Countries (OPEC) and its allies, including Russia the group, called OPEC+, comes ahead of the European Union embargo on Russian oil that could squeeze supplies in a market already tight and increase the rate of inflation.
“We consider that the effect on the price of the measures announced is significant” stated Jorge Leon who is senior vice president at Rystad Energy.
“By December of this year, Brent could be over $100 per barrel, which is an increase from our previous call to $89.”
Saudi Energy Minister Abdulaziz bin Salman said the actual cut in supply would be anywhere from 1 million to 1.1 million BPD. Saudi Arabia’s part of the cut is around 0.5 million BPD.
A number of OPEC+ members are struggling to meet their quotas due to underinvestment and sanctions.
The reduction in output coincides with central banks like the U.S. Federal Reserve and other central banks raising their interest rates to curb the pressure on inflation. Rising oil prices could result in further destruction of demand and were holding prices from increasing according to John Kilduff, partner at Again Capital LLC in New York.
“That’s the reason why we’re cutting down on the other side and is the reason prices have remained steady for WTI around 90 dollars,” Kilduff said.
U.S. President Joe Biden’s administration has criticized the agreement for being “shortsighted” and Biden’s White House said Biden would remain to determine whether it is appropriate to release additional supplies out of the Strategic Petroleum Reserve to lower costs.
The White House said it would be in contact with Congress on other ways to decrease the power OPEC and its allies have over energy prices, the apparent reference to legislation that could subject its members to lawsuits based on antitrust.
“This reduction in quotas is out of line with world crude oil inventories that are already low and are generally in the downward trend,” U.S. bank Morgan Stanley said.
“Nevertheless, OPEC+ emphasized the huge uncertainty surrounding demand for oil through 2023. The report also noted recent dramatic downgrades in GDP projections, as well as increasing recession probability probabilities.”
On Wednesday Russian Vice-Prime Minister Alexander Novak said Russia could reduce its oil production to try to mitigate the negative effects of the price cap imposed by the West regarding Moscow’s conduct in Ukraine.
A decrease in U.S. oil stockpiles last week also boosted prices. Stocks of crude fell from 1.4 million barrels to 429.2 million barrels during the week that ended in September. 30th, the Energy Information Administration said.
After OPEC+ agreed yesterday to reduce production to 2 million barrels per day and oil prices climbed, but in a smaller amount than some could have predicted. It remains to be determined what percentage of the cut will be physical, and what actions the U.S. would do in reaction to the cut.
“The market was not thrilled because the actual cuts will be less than of what the headline figure suggests,” Velandera Energy Partners CFO Manish Raj said to Market Watch.
Goldman Sachs went further, estimating the actual cuts in production at half a million barrels per day due to the difference between output and targets.
In fact, OPEC+ has been not meeting its own production goals for some time with the latest figure of August of more than 3 million barrels per day. Analysts have begun to believe that the reduction in production that was agreed upon at this meeting could be more of a strategy to bring the production targets closer to reality than anything else.
It is not yet clear if OPEC+ will cut production in real terms or move towards to new targets, the price surge predicted ahead of next week’s meeting in Vienna on Wednesday could remain in the background.
In relation to the reaction of the United States, there has been a suggestion from president Biden that the best response will be to release additional crude out of the reserve of strategic petroleum. The Biden administration requires low prices for fuel and is in need of them now and over the next few months until the midterm elections.
Despite the absence of information about the process of implementing the cut in production, Goldman raised its oil price goal up to $110 per barrel Brent for the fourth trimester of the year. JP Morgan also suggested Brent could increase to $100 by the end of the next quarter, following the decision by OPEC+ to cut.
There are still headwinds to be faced in the air, with the biggest being the fear of a global slowdown, and recessions being expected for some of the world’s most powerful economies like Germany. These headwinds could limit price increases unless supply decreases dramatically.
- On Wednesday, OPEC+ agreed to cut its November production targets by 2 million BPD. which was more than the consensus of analysts.
- Although oil prices have risen, however, gains have been restricted by the lack of specificity about the amount of oil that will be taken off markets.
- Despite the inconsistency, it is evident that the cut is positive for the oil market and banks are forecasting that Brent will exceed $100.
